Partners in Charity, Inc. v. Commissioner

U.S. Tax Court8/26/2013

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PARTNERS IN CHARITY, INC., PETITIONER v. COMMISSIONER
OF INTERNAL REVENUE, RESPONDENT

Docket No. 1701–11X. Filed August 26, 2013.

P was established as a nonprofit corporation under the laws
of Illinois. P applied for recognition of tax-exempt status,
explaining that its primary activity was to provide down-pay-
ment assistance grants to home buyers. R determined that P
was a charitable organization described in I.R.C. sec.
501(c)(3). In actual operation, P required each home seller to
pay to P the down-payment amount along with a fee. R retro-
actively revoked his determination, and P filed for a declara-
tory judgment under I.R.C. sec. 7428. Held: P’s down-payment
assistance program was not operated for a charitable purpose,
and P engaged in substantial commercial activities that did
not further an exempt purpose. Therefore, P is not an
organization described in I.R.C. sec. 501(c)(3). Held, further, R
did not abuse his discretion in making his adverse determina-
tion retroactive to the date of P’s incorporation.

Alvin S. Brown, for petitioner.
Mark A. Weiner, for respondent.
GUSTAFSON, Judge: After examining the activities of peti-
tioner, Partners In Charity, Inc. (‘‘PIC’’), for the years 2002
and 2003, the Internal Revenue Service (‘‘IRS’’) issued to PIC
a final adverse determination letter dated October 22, 2010,
revoking its recognition of PIC’s tax-exempt status. The rev-
ocation was retroactively effective to the date of PIC’s incor-
poration on July 10, 2000. On January 20, 2011, PIC timely
petitioned this Court pursuant to section 7428 1 and Rule
210, seeking a declaratory judgment that PIC was an
organization described in section 501(c)(3) during 2002 and
2003 (the examination years) and that the IRS’s revocation
of PIC’s tax-exempt status be declared null and void.
The issues for decision are: (1) whether during the exam-
ination years PIC was operated exclusively for a charitable
purpose (we hold that it was not); and (2) whether, in retro-
actively revoking its determination that PIC was an
organization described in section 501(c)(3), the IRS abused
its discretion (we hold that it did not).
1 Unless otherwise indicated, all section references are to the Internal

Revenue Code (26 U.S.C.), and all Rule references are to the Tax Court
Rules of Practice and Procedure.

151

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152 141 UNITED STATES TAX COURT REPORTS (151)

FINDINGS OF FACT

The administrative record underlying the IRS’s adverse
determination was filed with the Court in accordance with
Rule 217, and a subsequent trial was conducted in Wash-
ington, D.C. The parties stipulated some of the facts.
PIC’s formation
Before creating PIC, Charles Konkus was a real estate
developer in the Chicago area, focusing his business ventures
on developments for medium- to high-income consumers. Mr.
Konkus observed that home ownership was becoming more
difficult for low-income individuals, and he decided to create
a means for helping home buyers. Mr. Konkus incorporated
PIC as an Illinois not-for-profit corporation on July 10, 2000.
Mr. Konkus served as PIC’s executive director, devoting 40
hours a week to the job and receiving no direct compensation
in return. In addition to Mr. Konkus, PIC had two other
individuals on its board of directors—Katy Motlagh and
Jeanne Weaver—but they devoted virtually no time to their
positions with PIC. Mr. Konkus exercised unchecked control
over PIC’s operations and finances.
PIC’s application for recognition of tax-exempt status
In July 2000 PIC submitted to the IRS Form 1023,
‘‘Application For Recognition of Exemption Under Section
501(c)(3) of the Internal Revenue Code’’, on which PIC
reported:
Partners In Charity will provide down payment assistance program for
low income individuals and families to allow individuals who could not
otherwise do so to own their own home. Partners in Charity [sic] will
also engage in other affordable housing efforts, using excess contribu-
tions to develop low-income apartments for seniors and families, the
acquisition and rehabilitation of single-family homes, and contributions
to other housing related charitable organizations such as faith based
charities, community based charities and national charities such as
Habitat for Humanity.

In response to a question regarding PIC’s expected sources of
financial support PIC reported on Form 1023: ‘‘Partners in
Charity [sic] will solicit gifts from corporations, foundations,
and individuals with whom the members, directors and offi-
cers have personal relationships.’’ In addition PIC reported

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(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 153

that it expected to receive ‘‘gifts, grants, and contributions’’
of $100,000 during 2002 and $150,000 during 2003, and that
it expected to pay ‘‘contributions, gifts, grants and similar
amounts’’ of $80,000 and $120,000 during 2002 and 2003.
On October 2, 2000, the IRS asked PIC to provide assur-
ances (1) that PIC would serve a charitable class (mentioning
the safe harbor guidelines in Rev. Proc. 96–32, 1996–1 C.B.
717) and (2) that no private interests of individuals with a
financial stake in the project would be furthered. On October
9, 2000, PIC submitted to the IRS a ‘‘Statement of Policy’’
signed by Mr. Konkus as ‘‘President/Treasurer/Director’’ of
PIC, which stated:
Partners In Charity, Inc. has adopted a policy to comply with the low
income housing safe harbor guidelines in that at least 75% of units for
a given project will be made available for families earning 60% or less
of the area’s median income as adjusted for family size. The remaining
25% of the units for a given project will be made available to persons
on the lower end of the economic spectrum who may not necessarily be
members of a charitable class.
The Directors and Officers in Partners In Charity, Inc. are not real
estate developers, property managers or owners of significant parcels of
undeveloped lands. Partners In Charity, Inc. intends to have a commu-
nity-based Board of Directors once it established a track record and can
attract qualified community-based individuals to serve.

The IRS’s prior determination
On November 9, 2000, the IRS ruled favorably on PIC’s
application and issued to PIC a determination letter that
stated: ‘‘[B]ased on information you supplied, and assuming
your operations will be as stated in your application for rec-
ognition of exemption, we have determined you are exempt
from federal income tax under section 501(a) of the Internal
Revenue Code as an organization described in section
501(c)(3).’’ This determination was effective as of PIC’s incor-
poration date, July 10, 2000.
The DPA program
As its title suggests, PIC’s ‘‘down payment assistance’’
(‘‘DPA’’) program provided home buyers with funds to use for
down payments for home purchases. However, it obtained
those funds (along with a fee) from home sellers; and in only
two-tenths of 1% of its transactions did PIC make a DPA
grant where the seller was not reimbursing the down pay-

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154 141 UNITED STATES TAX COURT REPORTS (151)

ment and PIC’s fee. A seller’s payment to PIC equaled the
down payment amount that PIC gave to the buyer plus PIC’s
fee—i.e., either 0.75% of the final sale price or, in the case
of a professional home builder, $500.
PIC created and used a document entitled ‘‘Gift Letter and
Grant Application’’ to effect its agreements with buyers and
created and used a ‘‘Seller Participation Agreement’’ for
agreements between itself and sellers. In addition to those
documents, PIC collected the following information: the prop-
erty’s address; the buyer’s annual income; the buyer’s gender
and ethnicity; the name of the loan originator and lending
institution; the type of loan the buyer intended to use; a copy
of the purchase contract; a copy of the first two pages of the
appraisal report; and copy of the settlement statement
(HUD–1). Much of this information appeared on a form
called the ‘‘Gift Funds Request’’ form, which was created by
PIC and filled out by the buyer’s lender.
‘‘Seller Participation Agreement’’
PIC induced a prospective seller to sign a ‘‘Seller Participa-
tion Agreement’’. This agreement provided that a seller’s
property would qualify as a ‘‘Participating Home’’ in PIC’s
program if the seller (a) agreed to accept the buyer’s terms
for financing (using an eligible loan program that accepted
charitable gifts from non-profit organizations) and (b) deliv-
ered the real estate purchase contract to a PIC-approved
escrow officer or closing agent. The Seller Participation
Agreement further provides:
PIC agrees to assist in the dissemination of pre-qualification information
to prospective homebuyers, including the PIC home buying guide, and to
utilize the PIC Program to provide home ownership education and down
payment assistance to qualified homebuyers, any one of which may elect
to purchase the Participating Home.In consideration of the foregoing,
Seller agrees to make a contribution to PIC in the amount of * * * [the
down payment amount plus a fee of 0.75% of the purchase price] within
(2) business days from the transfer of the Participating Home to the
Buyer. [Emphasis added.]

The Seller Participation Agreement states: ‘‘[T]he [seller’s]
contribution will not be used to provide down payment assist-
ance to the Buyer of the [seller’s] Participating Home.’’
Instead, to fund the current buyer’s DPA grant, PIC used
money it had acquired from previous sellers’ contributions.

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(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 155

PIC would then use the current seller’s payments to fund
future grants and to cover PIC’s operating expenses. 2 A
seller was obligated to make a contribution to PIC only ‘‘if a
homebuyer utilizing the PIC Program purchases the [seller’s]
Participating Home’’.

‘‘Gift Letter and Grant Application’’
A buyer requested PIC funding by submitting to PIC a
signed ‘‘Gift Letter and Grant Application’’, which stated in
part:
Once Partners In Charity, Inc., a non-profit organization, has received
the following:
1. A signed copy of this form.
2. A copy of the Seller Participation Agreement.
3. The lender’s request for gift funds.
4. Copy of Appraisal (First 2 pages only)
5. Copy of Purchase and Sale Agreement
6. Closing Office Wire Instructions
PIC will wire Gift Funds to the closing office, in the amount of * * *
[the down payment] to assist you in the purchase of your new home.

The terms of the grant application are consistent with PIC’s
practices that its payment of a DPA grant was subject to the
condition precedent that PIC receive a ‘‘Seller Participation
Agreement’’, pursuant to which the seller agreed to con-
tribute to PIC the grant amount plus a fee if a home buyer
using the PIC program purchased the seller’s house.
If the buyer was unsuccessful in obtaining a loan (or if the
lender did not actually provide the loan proceeds shortly
after PIC’s funds were received by the closing office), then
the buyer agreed that the escrow agent would return the
down payment funds to PIC. If the purchase transaction con-
cluded successfully, then the buyer was under no obligation
to repay the DPA grant to PIC.
The flow of funds at closing
The record contains several HUD–1 settlement statements
for transactions in which PIC participated. The HUD–1 lists
PIC’s DPA grant as an ‘‘amount paid by or on behalf of bor-
2 PIC also donated a small portion of each seller’s contribution to other

charitable organizations.

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156 141 UNITED STATES TAX COURT REPORTS (151)

rower’’, and it lists the seller’s contribution and fee to PIC as
a ‘‘reduction in amount due to the seller’’. An escrow agent
generally transferred the seller’s payments to PIC at closing
or shortly thereafter. Thus, the essence of the arrangement
was that the buyer was excused from having to come up with
the money to make a down payment; and the down payment
was instead indirectly paid by the seller 3 out of the sales
proceeds that were provided by the lender.
The buyers’ incomes
Although PIC collected information about grantee buyers’
annual incomes and ethnicities, PIC did not use this or any
other information to assure that a grantee was a member of
the class described in the policy statement (‘‘families earning
60% or less of the area’s median income as adjusted for
family size’’) that PIC provided when the IRS was consid-
ering its application. PIC did not collect any information con-
cerning the buyer’s marital or parental status (and so could
not know ‘‘family size’’). PIC made the DPA program avail-
able indiscriminately to a broad range of buyers, not just
those with low incomes or in under-served populations. 4 Mr.
Konkus testified at trial about an example of an $85,000
home (‘‘certainly a modest house, Your Honor’’) that was
financed by a loan from the Federal Housing Authority
(‘‘FHA’’) 5 that required a down payment of 3%—calling for
3 As
we noted above, the seller’s contribution did not directly fund the
down payment in his own transaction, which came instead from funds ad-
vanced to the escrow agent by PIC. However, since 99.8% of the sellers
participating in the PIC DPA program ‘‘contributed’’ at closing an amount
equal to the down payment plus PIC’s fee, it is clear that a given seller
indirectly provided the down payment for his own transaction.
4 One of PIC’s fliers advertised: ‘‘If you can get the mortgage, we’ll give

you the down payment. It’s extremely easy to receive your FREE gift from
PIC. In fact, there is only one requirement you must meet. You must qual-
ify for any eligible loan program with your lender. Don’t worry; they have
many programs to meet your needs.’’ Another flyer advertised: ‘‘No Income,
Asset or First Time Buyer Restrictions’’.
5 Congress created the FHA through the National Housing Act of 1934,

ch. 847, sec. 2, 48 Stat. at 1246 (codified as amended at 12 U.S.C. sec. 1709
(2006)). FHA was established primarily for the purpose of insuring mort-
gage lenders against default by borrowers. Id. sec. 1709(b)(9). Before FHA
can insure a single-family home mortgage, the loan must meet certain eli-
gibility requirements set forth in the National Housing Act. 12 U.S.C. sec.
1709. One of these eligibility requirements involves the 3% down payment

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(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 157

PIC to make a DPA grant of $2,550. However, throughout
2002 and 2003 almost 600 of PIC’s DPA grants exceeded
$10,000; and PIC made at least two DPA grants of $100,000
or more to assist buyers purchasing property priced over $1
million.
PIC also collected information about buyers’ financing
arrangements. In most cases buyers using PIC’s DPA pro-
gram obtained FHA loans. This fact, however, does not show
that the PIC buyers are members of a charitable class. Con-
trary to Mr. Konkus’s assertions, there does not appear to
have been a maximum income level that would have dis-
qualified a borrower from receiving an FHA loan; rather, the
only limitations on FHA loans appear to have been related
to a borrower’s credit-worthiness and the value of the pur-
chased house. 6 In addition, PIC did not limit its program to
buyers who used FHA financing. Any financing (including
conventional mortgages) was permissible.
Payment by and benefits to sellers
PIC advertised that its DPA program financially benefited
sellers by: (1) providing sellers with ready buyers, (2)
enabling the sellers to sell for higher prices, 7 and (3)
allowing them to sell faster because of the larger pool of

of the home’s acquisition cost. Id. sec. 1709(b)(9).
6 See 12 U.S.C. sec. 1709; 24 C.F.R. secs. 203.17–203.26 (2012) (Mortgage

provisions). PIC points to no specific rule, regulation, or guideline that re-
stricts FHA loans to the poor.
7 Several of PIC’s promotional materials claimed that PIC’s DPA pro-

gram generally increased sellers’ net proceeds. One particular flyer listed
step-by-step instructions for sellers; and, after stating that sellers were re-
quired to pay PIC the down payment amount and a fee, the flyer stated:
To make the transaction fair for you, the buyer will most likely offer full
value on your property. This benefits you dramatically. To illustrate this,
you need to know that on average, sellers take a reduction in the price
to sales price of 5–7%. This means that a home listed at $100,000 would
normally sell for $93,000 to $95,000 if the buyer didn’t use the PIC Pro-
gram. If they use the program, you will most likely sell your home for
the list price of $100,000 and contribute $3,000 of the downpayment plus
a fee of only .75% of the sales price to PIC. This means you’ll net
$96,250 instead of $93,000-$95,000.
That’s $1,250-$3,250 MORE FOR USING PIC! We’re Helping You PIC
Your Future!

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158 141 UNITED STATES TAX COURT REPORTS (151)

potential buyers. 8 Consistent with the language in the
‘‘Seller Participation Agreement’’ that PIC’s benefits to
sellers were ‘‘in consideration for’’ sellers’ contributions and
fees, we find that in PIC’s transactions with sellers, the
seller paid PIC a fee for a service. PIC received virtually all
of its funding from payments by sellers for the services it
provided to them; and when considered in combination with
PIC’s marketing strategy, commission-like fee structures,
and significant revenues, we find that PIC’s commercial
activity with sellers was a substantial part of PIC’s oper-
ation. This commercial activity was in fact PIC’s primary
purpose.
PIC’s other activities
In conjunction with the DPA program, PIC educated poten-
tial buyers about purchasing a home and about various
responsibilities associated with home ownership. The edu-
cational materials provided by PIC also helped buyers to
develop action plans for buying a home. PIC’s educational
programs were evidently informative and, we assume, bene-
ficial to prospective home buyers. However, we find that pro-
viding education to home buyers was neither PIC’s exclusive
nor its primary purpose.
PIC contends that by requiring a copy of an FHA appraisal
report before making a DPA grant, it assured that prospec-
tive houses were habitable, clean, and decent properties suit-
able for low-income buyers. In addition, PIC alleges that it
examined HUD–1 settlement statements to assure that
buyers were not paying inappropriate fees. Collecting the
appraisal report and the HUD–1 might have provided PIC
with information that, if examined carefully, might have
helped enable it to protect buyers from uninhabitable or
unsafe property or inappropriate lender fees; but we find
that PIC did not use information from the appraisal reports
8 Another PIC flyer that was directed to sellers and builders stated:
Participating in the PIC program opens up the seller’s market by 30–
40% because more buyers qualify. * * * There are no restrictions, like
many bond or local affordable housing programs: NO First Time Home-
buyer Requirements; NO Income Asset Restrictions; NO Recapture
Clauses (the borrower never needs to pay it back); NO Reserved Re-
quired; NO Geographic Boundaries; Use With Any Program.

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and the HUD–1 statements for these purposes. PIC
requested only the first two pages of appraisal reports, and
this limited excerpt would not provide adequate information
for evaluating the habitability of a house. For instance,
information about adverse environmental conditions that the
property might have (e.g., lead-based paint) or repairs that
the property might need would often be omitted from those
two pages or would be discussed in an addendum or addi-
tional comments to the appraisal report not provided to or
examined by PIC. PIC did not require or request a home
inspection report on a house before making a DPA grant. In
addition, PIC received the HUD–1 only after the purchase
was already completed, and any review of lender fees
reported on the HUD–1 would have come too late to provide
any benefit to buyers. PIC thus did not protect buyers from
hazardous fees or uninhabitable properties.
With regard to ‘‘other affordable housing efforts’’ men-
tioned in PIC’s Form 1023, PIC’s financial statements
indicate that PIC lent $513,478 to ‘‘Partners in Charity Mar-
keting’’, which Mr. Konkus owned and which in 2003 he
renamed ‘‘Restoration America’’; but we cannot tell from the
record how these funds were used nor whether the loan had
a charitable purpose. PIC did not persuade us that excess
PIC funds were used to develop low-income apartments for
seniors and families or to acquire and rehabilitate single-
family homes for low-income individuals.
PIC’s finances
PIC’s income and expenditures greatly exceeded the
expectations it reported on its Form 1023. According to
annual financial reports, PIC received payments from home
sellers participating in the DPA program totaling
$28,644,173 in 2002 and $32,439,723 in 2003. Revenues from
home sellers were PIC’s primary source of income in 2002
and 2003, 9 and PIC did not receive any charitable contribu-
tions, gifts, or grants in those years.
In 2002 PIC made 5,743 DPA grants totaling $25,206,041.
Similarly, in 2003 PIC made 5,704 DPA grants totaling
$29,058,724.
9 PIC also reported revenue from interest on cash investments, divi-

dends, and gain from the sales of securities.

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160 141 UNITED STATES TAX COURT REPORTS (151)

Apart from its DPA grant obligations, PIC incurred
expenses in 2002 totaling $1,641,125. Of this amount
$564,933 was for marketing expenses paid to Royale
Dynamics, Inc. (RDI), a company (discussed below) that was
wholly owned by Mr. Konkus’s wife. Similarly, in 2003 PIC
incurred expenses totaling $2,266,831, which included
$580,234 paid to RDI. Apart from DPA grants, PIC’s aggre-
gate payments to RDI accounted for its largest expenditures
in both 2002 and 2003.
By the end of 2003, PIC had accumulated unrestricted net
assets totaling $3,592,271.
Royale Dynamics, Inc.
RDI is a for-profit Illinois corporation, wholly owned by
Mr. Konkus’s wife, Tammy Butler. RDI was created in 1983,
and by 2001 Ms. Butler had developed experience marketing
in the mortgage industry. Mr. Konkus decided to use his
wife’s company to promote PIC’s DPA program to lenders
who offered mortgage products to low-income borrowers most
likely to benefit from PIC’s services. In 2001 PIC entered into
an exclusive marketing agreement with RDI, under which
RDI would design all marketing, Web site, and advertising
materials, and would promote the PIC Program in the mort-
gage and real estate industry. PIC’s contracts with RDI
stated that RDI’s objective was to enable PIC to ‘‘close the
highest possible number of [t]ransactions’’ and ‘‘quickly
obtain market share and a national presence in the delivery
of the PIC program services’’. To this end, RDI created mate-
rials marketing the PIC program to buyers, sellers, and
home builders, as well as marketing materials and sales
technique training for real estate agents and lenders, to help
them generate business and close transactions.
In exchange for its service obligations, RDI was to receive
30% of PIC’s fees generated from each transaction that used
a PIC DPA grant, subject to the following limitations: RDI’s
annual compensation could not exceed $567,000 in 2002 and
$581,000 in 2003. RDI’s compensation from PIC was similar
to that of other firms in the DPA industry. PIC provided
substantially all of RDI’s revenue in 2002 and 2003.

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IRS’s revocation
The IRS examined PIC’s activities during the years 2002
and 2003, and on October 22, 2010, the IRS issued a final
adverse determination, revoking its recognition of PIC’s tax-
exempt status. The IRS concluded that PIC did not operate
exclusively for an exempt purpose, as required under section
501(c)(3). The IRS’s conclusion was based on its findings
that: (1) PIC’s net earnings inured to the benefit of private
individuals or shareholders; (2) more than an insubstantial
part of PIC’s activities was not in furtherance of an exempt
purpose; (3) PIC operated for the benefit of private interests;
and (4) PIC operated for the primary purpose of carrying on
an unrelated trade or business.
The final adverse determination letter states in a header
that the applicable tax years are ‘‘12/31/02 and subsequent’’;
however, the text states that the IRS made its adverse deter-
mination retroactive to PIC’s incorporation date, July 10,
2000.

OPINION

I. Procedural issues
Section 7428(a) confers jurisdiction on the Tax Court ‘‘[i]n
a case of actual controversy’’ to ‘‘make a declaration’’ with
respect to an organization’s ‘‘continuing qualification’’ as an
organization described section 501(c)(3) that is exempt from
tax under section 501(a). For purposes of section 7428, ‘‘a
determination with respect to continuing qualification * * *
includes any revocation of or other change in a qualification’’.
Sec. 7428(a).
The parties have tried this case under Rule 217(a), which
provides: ‘‘Disposition of an action for declaratory judgment
involving a revocation * * * may be made on the basis of the
administrative record alone only where the parties agree that
such record contains all the relevant facts and that such
facts are not in dispute.’’ (Emphasis added.) Since PIC does
not agree that the administrative record contains all the rel-
evant facts, we do not limit the evidence to that which is con-
tained in the administrative record. Furthermore, Rule
217(b) provides that, in an action involving a revocation, ‘‘the

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162 141 UNITED STATES TAX COURT REPORTS (151)

Court may, upon the basis of the evidence presented, make
findings of fact which differ from the administrative record.’’
The parties did not address the standard of review that we
should apply, although both implicitly tried it under a de
novo standard, with the Commissioner free to make new
arguments at trial. See H.R. Rept. No. 94–658, at 285 (1976),
1976–3 C.B. (Vol. 2) 977 (‘‘The court is to base its determina-
tion upon the reasons provided by the Internal Revenue
Service in its notice to the party making the request for a
determination, or based upon any new argument which the
Service may wish to introduce at the time of the trial’’); cf.
IHC Health Plans, Inc. v. Commissioner, T.C. Memo. 2001–
246, 2001 WL 1103284, at *11, aff ’d, 325 F.3d 1188 (10th
Cir. 2003).
In these circumstances, the burden of proof rests on the
petitioner to demonstrate that the IRS’s determination was
incorrect. Rule 142(a); 10 Rameses Sch. of San Antonio, Tex.
v. Commissioner, T.C. Memo. 2007–85. PIC’s pretrial memo-
randum contends that the burden should shift to the
Commissioner pursuant to section 7491. The Commissioner
argues that section 7491 does not apply in a declaratory
judgment action brought under section 7428. Because we
determine by the preponderance of the evidence the facts in
this case that relate to the revocation of petitioner’s exemp-
tion ruling, we need not determine whether the burden of
proof on the issue of tax-exempt status has shifted. See Mar-
tin Ice Cream Co. v. Commissioner, 110 T.C. 189, 210 n.16
(1998).
On the issue of the retroactivity of the IRS’s adverse deter-
mination, our standard of review is different. Section
7805(b)(8) provides that ‘‘[t]he Secretary [of the Treasury]
may prescribe the extent, if any, to which any ruling
(including any judicial decision or any administrative deter-
mination other than by regulation) relating to the internal
10 Under
the pre-2003 Rule 217, the petitioner in a declaratory judgment
action bore the burden of proof with regard to reasons offered in the deter-
mination (or revocation) letter, and the Commissioner bore the burden of
proof with any new reasons. Rule 217(c), 109 T.C. 661. However, in 2003
we amended Rule 217, deleting paragraph (c) because we did ‘‘not wish to
suggest by Rule that * * * section [7491] does not apply [to declaratory
judgment actions]’’. Rule 217 note, 120 T.C. 641. Thus, we assume the gen-
eral rules in Rule 142(a) apply in this declaratory judgment action.

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(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 163

revenue laws shall be applied without retroactive effect.’’
Pursuant to this authority the Secretary has given the IRS
discretion to retroactively revoke exemption rulings or deter-
mination letters where ‘‘the organization omitted or mis-
stated a material fact, [or] operated in a manner materially
different from that originally represented’’. 26 C.F.R. sec.
601.201(n)(6)(i), Statement of Procedural Rules. A retroactive
revocation of a tax-exemption ruling will not be disturbed in
the absence of an abuse of discretion, Auto. Club v. Commis-
sioner, 353 U.S. 180, 184 (1957), and we therefore review
that retroactive determination for abuse of discretion.
II. Section 501(c)(3)
A. In general
In order to be described in section 501(c)(3), an organiza-
tion must be both ‘‘organized and operated exclusively[11] for’’
certain specified exempt ‘‘purposes’’, which include religious,
charitable, educational, and scientific purposes. Sec.
501(c)(3); Am. Campaign Acad. v. Commissioner, 92 T.C. at
1062–1063. The Commissioner does not dispute that PIC is
organized exclusively for exempt purposes (since PIC’s orga-
nizing documents do not fail to so state), see 26 C.F.R. sec.
1.501(c)(3)–1(b), Income Tax Regs., but instead maintains
that PIC failed to operate exclusively for exempt purposes (a
requirement that calls for an examination of PIC’s actual
operations).
Determining whether an organization pursues an exempt
purpose requires more than a superficial observation of its
activities. B.S.W. Grp., Inc. v. Commissioner, 70 T.C. 352,
356–357 (1978) (‘‘the purpose towards which an organiza-
tion’s activities are directed, and not the nature of the activi-
11 26 C.F.R. section 1.501(c)(3)–1(c)(1), Income Tax Regs., provides: ‘‘An

organization will be regarded as operated exclusively for one or more ex-
empt purposes only if it engages primarily in activities which accomplish
one or more of such exempt purposes specified in section 501(c)(3). An or-
ganization will not be so regarded if more than an insubstantial part of its
activities is not in furtherance of an exempt purpose.’’ (Emphasis added.)
That is, under the statute the exempt purposes must be ‘‘exclusive’’, but
the regulation provides that an organization may be tax exempt even if its
operations include activities in furtherance of non-exempt purposes, pro-
vided that those activities are ‘‘insubstantial’’. PIC’s non-exempt purposes
(and associated activities) are very substantial.

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164 141 UNITED STATES TAX COURT REPORTS (151)

ties themselves, is ultimately dispositive of the organization’s
right to be classified as a section 501(c)(3) organization’’).
Research may further an exempt scientific purpose, but the
same research undertaken in a different context may be part
of a taxable business. See, e.g., Jockey Club v. Helvering, 76
F.2d 597, 597–598 (2d Cir. 1935), aff ’g 30 B.T.A. 670 (1934).
Distributing religious literature may further an exempt reli-
gious purpose, or in a different context it may be part of a
taxable enterprise. Scripture Press Found. v. United States,
285 F.2d 800 (Ct. Cl. 1961). Teaching may further an exempt
educational purpose, but the same sort of teaching under-
taken in a different context may be part of a taxable, for-
profit enterprise. See, e.g., Underwriters’ Labs. v. Commis-
sioner, 135 F.2d 371, 373–374 (7th Cir. 1943), aff ’g 46 B.T.A.
464 (1942); Rameses Sch. of San Antonio, Tex. v. Commis-
sioner, T.C. Memo. 2007–85. One may feed the hungry in a
soup kitchen or in a four-star restaurant; one may heal the
sick in a Third-World clinic or in a lucrative medical practice;
one may build a chapel in apostolic poverty with St. Francis
or in a construction business. Likewise, one may contribute
down payments in order to house the homeless poor, or in
order to facilitate a commercial real estate business. Even in
a commercial, profit-motivated context, such activities may
be wholesome and commendable; but they will not support
tax-exempt status unless they are undertaken to further an
exempt purpose.
Moreover, the requisite ‘‘purpose’’ does not consist simply
of a charitable motive (i.e., a desire that charitable benefit
ultimately result from one’s activities). Someone’s main
subjective motive for engaging in an activity may be, for
example, religious, but his religious organization will be tax
exempt only if the organization is operated to accomplish a
religious purpose. In Scripture Press Found., 285 F.2d at 804,
an organization that published and sold Sunday School mate-
rials was held not exempt, notwithstanding the sincere reli-
gious motives of its principals:
We think that plaintiff ’s assertion that its instructional activities are
more important to plaintiff than its selling activities is entirely sincere.
The evidence in this case * * * shows that throughout its history Scrip-
ture Press has been led by people of devout and intense religious convic-
tion. However, the intensity of the religious convictions of the plaintiff ’s
members and officers cannot operate to exempt them from the tax law

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(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 165

if the activities of the plaintiff cannot in themselves justify such an
exemption. * * *

Likewise, a founder’s subjective motive to educate poor
people or facilitate their housing will not support tax-exempt
status for his organization if it is not actually operated to
accomplish a tax-exempt purpose.
To determine PIC’s ‘‘purpose’’ within the meaning of sec-
tion 501(c)(3), we therefore examine not Mr. Konkus’s subjec-
tive motives but PIC’s activities in their context.
B. Charitable class
PIC contends that it operated to serve charitable purposes
by providing to low-income individuals both DPA grants and
financial counseling seminars and other educational pro-
grams designed to prepare potential home buyers for the
responsibility of home ownership. PIC made over 5,700
grants in both 2002 and 2003 (about 16 a day) totaling over
$25 million per year. Of its proffered activities, PIC’s DPA
program was certainly its primary activity during 2002 and
2003, with the educational programs either secondary or
supplemental to the DPA program. The Commissioner argues
that PIC’s DPA program was not operated to achieve a chari-
table purpose. Accordingly, our first inquiry is whether PIC’s
DPA program served a charitable purpose.
The term ‘‘charitable’’ for purposes of section 501(c)(3)
includes: (1) relief of poverty; (2) advancement of education
or science; (3) advancement of religion; and (4) other pur-
poses that are beneficial to the public or the community at
large. 26 C.F.R. sec. 1.501(c)(3)–1(d)(2); see also Columbia
Park & Recreation Ass’n, Inc. v. Commissioner, 88 T.C. 1, 18–
21 (1987), aff ’d without published opinion, 838 F.2d 465 (4th
Cir. 1988). It would be possible to provide home-purchase
down payment grants in such a manner that they further
charitable purposes, see Rev. Rul. 2006–27, 2006–1 C.B. 915;
but merely inducing home sellers to pay a fee and to provide
funds for home buyers’ down payments does not establish a
charitable purpose. For the purpose of the program to be
charitable, the recipients of the down payment grants must
be members of a charitable class so that their receipt of the

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166 141 UNITED STATES TAX COURT REPORTS (151)

grants helps to relieve the poor and distressed 12—or furthers
some other charitable purpose. See Am. Campaign Acad. v.
Commissioner, 92 T.C. at 1076–1077. PIC’s grants were not
targeted to a charitable class.
PIC contends that it relieved the poor and distressed by
following the guidelines set forth in Rev. Proc. 96–32, 1996–
1 C.B. 717. That revenue procedure describes a situation
involving organizations that provide low-income housing
assistance that the IRS considers to be ‘‘charitable’’, because
the organizations ‘‘relieve the poor and distressed’’. The rev-
enue procedure’s first requirement is that—
[t]he organization establishes for each project that (a) at least 75 percent
of the units are occupied by residents that qualify as low-income; and
(b) either at least 20 percent of the units are occupied by residents that
also meet the very low-income limit for the area or 40 percent of the
units are occupied by residents that also do not exceed 120 percent of
the area’s very low-income limit. Up to 25 percent of the units may be
provided at market rates to persons who have incomes in excess of the
low-income limit. [Id. sec. 3.01(1), 1996–1 C.B. at 717.]

The Commissioner does not dispute that an organization like
PIC, which provides down payment assistance, could rely on
Rev. Proc. 96–32, supra; but the Commissioner argues that
PIC fails to satisfy the requirements set out therein. While
PIC ostensibly adopted a policy similar to the requirement of
Rev. Proc. 96–32, supra, quoted above, PIC’s policy was only
nominal. PIC did not implement any internal controls to
assure that it accomplished its stated policy. To the contrary,
PIC offered its DPA grants to anyone who qualified for a
mortgage and requested down payment assistance, and there
were no income limits.
PIC argues that in fact it served low-income individuals,
pointing to PIC’s requirement that grant recipients report
12 Relying
on Government Accountability Office Publication No. 06–24,
‘‘Mortgage Financing, Additional Action Needed To Manage Risks of FHA-
Insured Loans With Down Payment Assistance’’ (November 2005), the
Commissioner alternatively contends that seller-funded down payment as-
sistance programs do not actually benefit buyers. PIC’s literature indicates
that its ‘‘contribution’’ of the down payment discourages the buyers from
negotiating the price and consequently results in substantially higher sale
prices—thus possibly causing a net reduction in the amount of equity that
the typical buyer has in the house. However, since we find other bases for
our holding that PIC did not operate exclusively for charitable purposes,
we do not reach this alternative argument.

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(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 167

their annual income. PIC argues that examination of those
income figures indicates that grant recipients were in fact
low-income individuals. PIC also cites the fact that almost all
of its grant recipients qualified for FHA loans. These argu-
ments fail for two reasons:
First, merely establishing after the fact that grant recipi-
ents generally had low incomes, when the program
indiscriminately offered the grants to anyone who wanted
them, does not establish that the organization was operated
for an exempt purpose. As we noted above, the key factor for
exemption under section 501(c)(3) is the purpose of the
activity and not the nature of the activity. B.S.W. Grp., Inc.
v. Commissioner, 70 T.C. at 356–357. PIC’s assertions, if
true, might enable one to say that the PIC’s activities had a
charitable effect, which would be commendable; but such an
effect does not alone warrant tax-exempt status under sec-
tion 501. While evidence of an organization’s effect is often
indicative of the organization’s purpose, the effect per se may
not carry the day (as the founders of Scripture Press learned
when the religious effects of their publications did not result
in tax-exempt status, Scripture Press Found., 285 F.2d at
805–806).
Second, PIC’s evidence does not establish that in fact its
grants went to persons with low incomes. PIC did not use
grantees’ income and family size as qualification criteria in
its grant approval process (though it represented to the IRS
that it would do so). Rather, PIC approved grants without
regard to grantees’ incomes. Moreover, PIC did not provide
any analysis or statistics that would support a finding: (1)
that its grantees were poor, distressed, or underprivileged or
(2) that providing down payment assistance to them would
constitute relief to such classes. See 26 C.F.R. sec.
1.501(c)(3)–1(d)(2). PIC merely asserts, without evidence,
that it served ‘‘low and moderate income buyers’’.
Similarly, showing that many PIC grantees had been
approved for FHA loans does not establish that PIC operated
to relieve poverty. As we noted above, there do not appear to
have been any income limitations that would have prevented
upper-income individuals from qualifying for an FHA loan.
More important, even if FHA rules did restrict FHA loans to
individuals with low incomes, PIC did not limit its program
to buyers that used FHA financing. Rather, PIC’s DPA

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168 141 UNITED STATES TAX COURT REPORTS (151)

grants were available to individuals with any type of
financing, not just financing often used by low-income
buyers.
Indiscriminately giving money away to anyone who will
take it is not a charitable purpose, even if some of the recipi-
ents are poor people. Section 501(c)(3) requires more; it
requires that the money be given away in such a way that
it furthers a purpose of reducing poverty, promoting edu-
cation, science, or religion, or promoting another public good.
We conclude that, during 2002 and 2003, PIC’s DPA program
did not operate for a charitable purpose.
C. Commerciality
During the examination years, PIC engaged in two over-
lapping but distinct forms of activities: (1) activities that ulti-
mately benefited the buyers (e.g., DPA grants and home
owner education) and (2) activities that ultimately benefited
the sellers (e.g., providing ready buyers, and promoting
faster sales at generally higher prices). PIC’s transactions
with sellers generated significant revenues (over $28 million
in 2002 and $32 million in 2003) and were clearly substan-
tial. Even assuming, arguendo, that PIC’s buyer-benefiting
activities served an exempt purpose, PIC’s seller-benefiting
activities failed to further an exempt purpose and defeat the
contention that PIC was operated exclusively for a charitable
purpose. See Better Bus. Bureau of Wash., D.C. v. United
States, 326 U.S. 279, 283 (1945) (‘‘the presence of a single
* * * [non-exempt] purpose, if substantial in nature, will
destroy the exemption regardless of the number or impor-
tance of truly * * * [exempt] purposes’’).
An organization is not necessarily disqualified from tax-
exempt status solely because it generates fees in exchange
for goods or services, or because it conducts a business. How-
ever, if an organization conducts activity ‘‘with an apparently
commercial character as its primary activity, ‘that fact
weighs heavily against exemption.’’’ Living Faith, Inc. v.
Commissioner, 950 F.2d 365, 373 (7th Cir. 1991) (quoting
B.S.W. Grp., Inc. v. Commissioner, 70 T.C. at 359), aff ’g T.C.
Memo. 1990–484.
When an organization engages in substantial fee-for-
service or other business activities, the regulations under

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(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 169

section 501(c)(3) provide two overlapping standards to con-
sider: (1) whether the organization was ‘‘organized or oper-
ated for the primary purpose of carrying on an unrelated
trade or business, as defined in section 513’’, 26 C.F.R. sec.
1.501(c)(3)–1(e), and (2) whether the activity fails to further
the organization’s exempt purpose, 26 C.F.R. sec. 1.501(c)(3)–
1(c)(1). If the answer to either of those is yes, then the
organization is not operated exclusively for an exempt pur-
pose. PIC fails under both standards.
If a trade or business is not ‘‘substantially related (aside
from the need of such organization for income or funds or the
use it makes of the profits derived)’’ to the performance of a
‘‘charitable, educational, or other purpose or function consti-
tuting the basis for its exemption under section 501’’, then it
is an ‘‘unrelated trade or business’’. Sec. 513(a). A tax-exempt
organization cannot operate for the primary purpose of car-
rying on an unrelated trade or business. 26 C.F.R. sec.
1.501(c)(3)–1(e). We are to ‘‘consider all the circumstances’’ in
deciding whether PIC is operated for the primary purpose of
carrying on an unrelated trade or business or whether PIC’s
fee-generating activity furthered a charitable purpose. Impor-
tant factors indicating a nonexempt commercial purpose
include ‘‘the particular manner in which an organization’s
activities are conducted, the commercial hue of those activi-
ties, and the existence and amount of annual or accumulated
profits’’. B.S.W. Grp., Inc. v. Commissioner, 70 T.C. at 358.
PIC required the payment of fees in more than 99% of its
transactions. By the end of 2003, PIC had generated accumu-
lated profits of $3,592,271. With the small exception of
interest and capital gains from securities, seller fees were
PIC’s only source of revenue in 2002 and 2003. PIC contracts
with RDI encouraged ‘‘clos[ing] the highest possible number
of [t]ransactions’’ and ‘‘quickly obtain[ing] market share’’ and
resulted in significant funds paid to PIC’s director’s wife.
As a purported charitable organization, PIC nominally
satisfied HUD guidelines as a source for down payment
assistance; 13 but in fact PIC’s arrangement with sellers (i.e.,
13 With regard to FHA loans, 12 U.S.C. sec. 1709(b)(9)(B) (2012) allows

borrowers to acquire down payment funds from family members. HUD pol-
icy allowed down payment funds from a few additional sources: the bor-
rower’s employer or labor union, a governmental entity, a charitable orga-
Continued

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170 141 UNITED STATES TAX COURT REPORTS (151)

PIC pays down payment money into escrow in advance of
closing and obtains reimbursement of it from the seller
through the closing) was substantially equivalent to trans-
actions that were disallowed under HUD policy, i.e., home
sellers providing potential buyers with down payments to
facilitate sales. See infra note 14. By using its founder’s
expertise and relationships in the real estate business and
using its ability to facilitate otherwise impermissible trans-
actions for the apparent benefit of both sellers and buyers,
PIC was able to create a lucrative fee-generating business.
Apart from funding buyers’ grants for the benefit of sellers,
PIC’s seller-related activities did nothing to further PIC’s
purported charitable goals. See Rev. Rul. 2006–27, supra.
PIC’s primary purpose was to broker as many transactions
as possible and thus to generate significant net profits,
regardless of whether the transactions achieved a charitable
end. Accordingly, even if PIC’s DPA program had served a
charitable class of buyers (it did not), PIC did not operate
exclusively for charitable purposes. See Easter House v.
United States, 12 Cl. Ct. 476, 486 (1987) (holding that an
adoption agency that provided related health and educational
services to pregnant women who agreed to place their
newborns for adoption with the organization was not exempt
because the business purpose was the primary goal of the
adoption agency), aff ’d without published opinion, 846 F.2d
78 (Fed. Cir. 1988). Rather, since PIC’s fee-generating
activity was its primary purpose for operating and that
activity was not ‘‘substantially related * * * aside from the
need of such organization for income or funds’’ to a charitable
end, PIC operated for the primary purpose of carrying on an
‘‘unrelated trade or business’’. See sec. 513; 26 C.F.R. sec.
1.501(c)(3)–1(e).
PIC argues that it did not give seller funds to a buyer—
an important requirement under the HUD guidelines. See
Penobscot Indian Nation v. HUD, 539 F. Supp. 2d 40, 44
(D.D.C. 2008). PIC contends that it received fees from sellers
only after closing and that the fees were necessary for PIC
nization, and a close friend with a clearly defined and documented interest
in the borrower. HUD Handbook 4155.1, Rev. 5, at 2–24 (October 2003).
However, HUD policy did not allow down payment assistance to come di-
rectly from home sellers or parties with an interest in the transaction. Pe-
nobscot Indian Nation v. HUD, 539 F. Supp. 2d 40, 44 (D.D.C. 2008).

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(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 171

to recoup the costs of its grants, and, therefore, the seller-
paid fees furthered the grant-making purpose. 14 This argu-
ment misses its mark. Before PIC gave funds to a buyer, PIC
required a promise from the seller that, immediately after
closing, the seller would pay PIC the buyer’s grant amount
plus a fee–and the evidence shows that in fact the seller’s
payment was made to PIC from the escrow, i.e., without risk
that the seller would renege. In essence, a DPA grant went
from PIC to the buyer, to the seller, and right back to PIC.
More important, however, PIC’s argument fails to provide an
explanation for its very substantial profits and for its obvious
profit motive. No entity accumulates profits of $3.6 million in
two years by accident. Those profits are strong evidence that
PIC’s commercial activities with sellers were its primary pur-
pose.
D. Educational and other activities
PIC also argues that it devoted significant time and
resources to financial counseling seminars and other edu-
cational programs designed to prepare potential home buyers
for the responsibility of home ownership, which PIC contends
supports a conclusion that it operated for educational pur-
poses. PIC’s efforts to educate potential buyers were signifi-
cant and perhaps even commendable. However, we cannot
analyze PIC’s educational activities in a vacuum; they must
be considered in conjunction with PIC’s other substantial
activities—in particular its DPA program and transactions
with sellers, neither of which furthered exempt purposes.
Many for-profit, non-exempt businesses go to considerable
efforts to educate their potential consumers. Teaching can
further a tax-exempt educational purpose, or it can further
non-exempt purposes. In PIC’s case, its teaching was a
means to the end of ‘‘clos[ing] the highest possible number of
[t]ransactions’’.
14 PIC
argues that its recouping its DPA grants from the sellers is simi-
lar to a tax-exempt hospital’s recouping fees associated with medical care
it provides. A hospital provides medical care, whereas PIC does not, of
course, provide housing, nor does it actually provide down payment funds
for the house sale but merely provides cover for the fact that the seller is
providing the down payment. But even assuming that PIC’s activity is
analogous to that of a tax-exempt hospital, PIC points to no instance of
a tax-exempt hospital’s profiting so handsomely from the recouping of fees.

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172 141 UNITED STATES TAX COURT REPORTS (151)

Moreover, as the Supreme Court has instructed, ‘‘the pres-
ence of a single non-educational [or non-charitable] purpose,
if substantial in nature, will destroy the exemption regard-
less of the number or importance of truly educational [or
charitable] purposes.’’ Better Bus. Bureau of Wash., D.C., 326
U.S. at 283. Accordingly, even if PIC provided helpful edu-
cation to potential buyers, the presence of its other substan-
tial non-exempt activities prevents us from concluding that
PIC was operated exclusively for educational purposes.
E. Conclusion
Since we have determined that PIC failed to serve a chari-
table class and that a substantial amount of its activity did
not further a charitable purpose (but furthered instead an
unrelated business), and since either of these determinations
by itself is fatal to PIC’s claim to be an organization
described in section 501(c)(3), we need not address the IRS’s
other reasons for revoking PIC’s exempt status (i.e., private
inurement and private benefit).
III. Retroactive effect
The last issue we must address is the propriety of the
IRS’s making its revocation retroactive. As we explained
above in part I, section 7805(b)(8) and 26 C.F.R. sec.
601.201(n)(6)(i) give the IRS discretion to retroactively
revoke exemption rulings or determination letters where ‘‘the
organization omitted or misstated a material fact, [or] oper-
ated in a manner materially different from that originally
represented’’; and we review that retroactive revocation for
abuse of discretion.
PIC operated in a manner that was different from what it
represented to the IRS in its application. PIC represented
there that its purpose was to ‘‘provide down payment assist-
ance program for low income individuals and families’’, that
its ‘‘down payment assistance will be provided only to
individuals who have a financial need for such services’’, and
that PIC intended to meet the safe harbor guidelines set
forth in Rev. Proc. 96–27, supra, which would assure that
certain percentages of individuals PIC served had incomes at
specified levels below the area’s median income. Despite
these representations, both the administrative record and the

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(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 173

trial record show that PIC did not have any income limita-
tions for its grantees, nor did it screen buyers for down pay-
ment assistance based on income. Rather, PIC provided a
grant to any home buyer who qualified for a loan.
PIC reported on its Form 1023 that it would ‘‘solicit gifts
from corporations, foundations, and individuals with whom
the members, directors and officers have personal relation-
ships.’’ However, PIC received virtually all of its funding
from sellers; and contrary to PIC’s characterization, seller
payments were not gifts nor did PIC have personal relation-
ships with sellers. Instead, those receipts were in consider-
ation for the services PIC provided the sellers.
For these reasons, we conclude that the IRS did not abuse
its discretion in revoking its initial determination retro-
actively.
Decision will be entered for respondent.

f

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Partners in Charity, Inc. v. Commissioner

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